Which closing entry is used when there is net income to transfer to owner's capital?

• A. Debit the owner's capital and credit the income summary
• B. Debit revenues and credit the income summary
• C. Debit income summary and credit owner's capital
• D. Debit cash and credit revenue

Answer: (C)

Closing the books for a sole proprietorship moves temporary accounts into the owner's equity. When there is net income, the balance in the income summary represents that profit and must be transferred to the owner's capital to reflect the increase in equity. The entry used is to debit the income summary and credit the owner's capital. This clears the income summary to zero, increases the owner’s capital by the net income amount, and keeps revenue and expense accounts ready for the next period.

For example, if revenues total 10,000 and expenses total 7,000, you first close revenues to income summary (debit Revenues, credit Income Summary) and close expenses to income summary (debit Income Summary, credit Expenses). Income Summary ends with a 3,000 credit balance, representing net income. Closing to owner's capital would be debit Income Summary 3,000 and credit Owner's Capital 3,000. The owner’s capital increases by 3,000, and the income summary is cleared to zero.